Do you really need to invest in International Mutual Funds
International Fund has gained a lot of traction as far as the interest of investors goes in recent times. Many investors want to add international funds to their portfolios to diversify their investments across different countries and invest in companies outside of India.
International mutual funds predominantly invest in a basket of equity funds based on different themes or countries. At present, international funds that invest in the USA, China and Globally Diversified companies are preferred by investors. Within the international mutual fund category, investors have so far invested predominantly in USA based funds. The strong performance of the US stock market in the last decade is one of the reasons why investors are inclined towards these funds.
|Fund Name||Investing in||Asset under Management (AuM)||1 Year||3 Year||5 Year||10 Year|
|Motilal Oswal NASDAQ 100 ETF||USA||4,746||31.98||29.09||27.84||27.02|
|Franklin India Feeder Franklin US Opportunities Fund||USA||3,764||25.85||23.96||22.91|
|Edelweiss Greater China Equity Off-shore Fund||China, Hong Kong & Taiwan||1,792||14.26||24.54||19.48||16.35|
|ICICI Prudential US Bluechip Equity Fund||USA||1,766||31.72||19.39||18.22|
|PGIM India Global Equity Opportunities Fund||Global||1,371||27.57||30.60||22.17||13.32|
|DSP US Flexible Equity Fund||USA||550||29.75||16.60||17.98|
|Note - Data as of 20 Aug, 2021. International Mutual Funds with AuM above Rs. 500 Crore|
Reasons for investing in International Mutual Funds
Geographical diversification across developed and other developing countries
These International mutual funds invest in countries like the USA, China, Europe, Emerging Markets, South Korea, Hong Kong, Japan, etc. depending on the fund that you choose to invest in. This help investors diversify their investment portfolio across different geographies.
Opportunity to invest in global leaders from different countries
Through International Mutual Funds, one can invest in companies like Alphabet, Apple, Microsoft, Amazon, Facebook, Samsung, Tencent, Paypal, Tesla, Baidu, TSMC, etc. which are not easy to invest directly. Many of these companies have a much higher market capitalization when compared with any Indian giant cap company. Investment can be done in many such global leaders with the help of International Funds.
Portfolio diversification in sectors and strength of different countries
There are international companies that have been dominant in the space of innovation, manufacturing, technology, etc. hence these funds offer scope to invest in different sectors which are not available in India. At the same time, different countries and regions offer investment opportunities like the USA in innovation and technology, China in manufacturing, Taiwan in the semiconductor industry, etc.
Limited or low correlation with Indian Stock Market
There have been many occasions where the Indian stock market and international stock markets have performed and move in different directions. The table below shows a low correlation between the Indian stock market and international markets. There are years like 2014, 2017, 2018 where the funds investing in India have outperformed the international funds. At the same time, there are years like 2013, 2016, 2019 and 2020 when international funds have delivered better returns. This establishes the limited or low correlation between the Indian stock market and the international. Such low correlation can work in investors favour and reduce the impact on the portfolio if one of the markets underperforms.
|Equity: Large Cap||15.46||10.53||1.10||30.92||3.71||-1.06||36.18||6.95|
|Equity: Flexi Cap||15.51||9.72||-5.21||36.68||4.06||3.16||51.87||3.95|
What are the risks of investing in International Mutual Funds
Limited knowledge or information about the companies
The International Mutual Funds invest in different countries and the companies that operate and are listed in other countries. There is limited information one may have about these geographies and companies. Sometimes, this lack of information affects investors investment as well. Unlike, in India where one has complete information about the geography, economy, growth prospect, opportunities and threats as well.
Currency or Exchange Rate Risk exist as the investment is in international markets
The fluctuation in currency or exchange rate can work either way for international fund investors. The fund invests in international stock markets in foreign currency and not INR. Hence, whenever INR will appreciate against the foreign currency, the portfolio value of the fund will reduce. At the same time, if INR depreciates against the foreign currency, the portfolio value of these funds will increase. This movement in currency rate has direct implications on the returns of international funds
High reliability on international fund manager
Most of these funds are Fund of Funds which are managed by the international fund manager. There is no active role of the Indian fund manager as the fund’s investment and portfolio is managed by the International fund manager. The performance of the fund is purely based on how well the overseas fund is managed and the expertise of the fund manager.
Overexposure to Technology is possible if investing in US-oriented funds
As we see most of the investors are investing in USA based International Funds, there is a strong presence of technology stocks in the overall portfolio. For example, NASDAQ has around 40% in technology stocks and we continue to see more innovative companies coming up in the USA. Alternatively, S&P 500 has around 30% in technology sectors and appear more diversified. If the trend continues then there is a possibility of overexposure in technology stocks
Who should invest in International Mutual Funds
- Investors who already have a well-diversified core portfolio based in India.
- Investors who want to supplement their domestic mutual fund portfolio with globally leading companies.
- Beginners should avoid investing as these funds carry more risk.
- Investors with moderate to high-risk profile can consider investing a maximum 10% in these funds.
- Investors who can hold on to this investment for a longer period i.e. more than 5 – 7 years.